<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 1999 Commission file number 000-21109
CUNO INCORPORATED
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Delaware 06-1159240
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 Research Parkway, Meriden, Connecticut 06450
(Address of principal executive offices) (Zip Code)
</TABLE>
(203) 237-5541
Registrant's telephone number, including area code
Not Applicable
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __________
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, .001 Par Value -- 16,260,087 shares as of July 31, 1999.
<PAGE> 2
CUNO INCORPORATED
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Consolidated Statements of Income - Three months ended July 31, 1999 and 1998 1
Consolidated Statements of Income - Nine months ended July 31, 1999 and 1998 2
Consolidated Balance Sheets - July 31, 1999 and October 31, 1998 3
Consolidated Statements of Cash Flows - Nine months ended July 31, 1999 and 1998 4
Notes to Unaudited Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
<PAGE> 3
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
1999 1998
---- ----
<S> <C> <C>
Net sales $ 56,348 $ 53,254
Less costs and expenses:
Cost of products sold 31,188 28,331
Selling, general and administrative expenses 15,044 15,146
Research, development and engineering 2,811 2,967
------------ ------------
49,043 46,444
------------ ------------
Operating income 7,305 6,810
Nonoperating income (expense):
Interest expense (291) (354)
Other income, net (91) 104
------------ ------------
(382) (250)
------------ ------------
Income before income taxes 6,923 6,560
Provision for income taxes 2,470 2,327
------------ ------------
Net income $ 4,453 $ 4,233
============ ============
Basic earnings per common share $ 0.28 $ 0.27
Diluted earnings per common share $ 0.27 $ 0.26
Basic shares outstanding 16,090,458 15,947,891
Diluted shares outstanding 16,396,254 16,298,820
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-1-
<PAGE> 4
CUNO INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
1999 1998
---- ----
<S> <C> <C>
Net sales $ 161,001 $ 148,585
Less costs and expenses:
Cost of products sold 92,068 81,829
Selling, general and administrative expenses 44,821 41,339
Research, development and engineering 8,618 8,482
------------ ------------
145,507 131,650
------------ ------------
Operating income 15,494 16,935
Nonoperating income (expense):
Interest expense (946) (876)
Other income, net 142 594
------------ ------------
(804) (282)
------------ ------------
Income before income taxes 14,690 16,653
Provision for income taxes 5,334 5,858
------------ ------------
Net income $ 9,356 $ 10,795
============ ============
Basic earnings per common share $ 0.58 $ 0.68
Diluted earnings per common share $ 0.57 $ 0.67
Basic shares outstanding 16,062,795 15,903,055
Diluted shares outstanding 16,288,431 16,229,433
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-2-
<PAGE> 5
CUNO INCORPORATED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share amounts)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 4,683 $ 4,433
Accounts receivable, less allowances for
doubtful accounts of $1,111 and $1,179, respectively 46,119 45,963
Inventories 27,009 27,646
Deferred income taxes 7,280 7,420
Prepaid expenses and other current assets 3,119 2,550
--------- ---------
Total current assets 88,210 88,012
Noncurrent assets
Deferred income taxes 2,035 2,016
Intangible assets, net 22,891 22,715
Pension intangible asset 554 467
Other noncurrent assets 2,373 2,284
Property, plant and equipment, net 58,824 56,072
--------- ---------
Total assets $ 174,887 $ 171,566
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank loans $ 17,331 $ 16,955
Accounts payable 15,533 15,655
Accrued payroll and related taxes 9,782 8,476
Other accrued expenses 7,330 9,032
Accrued income taxes 2,366 293
Current portion of long-term debt 1,726 6,437
--------- ---------
Total current liabilities 54,068 56,848
Noncurrent liabilities
Long-term debt, less current portion 11,756 15,437
Deferred income taxes 3,866 3,671
Retirement benefits 6,234 5,309
--------- ---------
Total noncurrent liabilities 21,856 24,417
Stockholders' equity
Preferred Stock, $.001 par value; 2,000,000 shares
authorized, no shares issued -- --
Common Stock, $.001 par value; 50,000,000 shares authorized,
16,260,087 and 16,256,283 shares issued and outstanding
(excluding 4,328 shares in treasury) 16 16
Additional paid-in-capital 39,198 37,780
Unearned compensation (2,203) (2,742)
Accumulated other comprehensive income 520 3,171
Retained earnings 61,432 52,076
--------- ---------
Total stockholders' equity 98,963 90,301
--------- ---------
Total liabilities and stockholders' equity $ 174,887 $ 171,566
========= =========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-3-
<PAGE> 6
CUNO INCORPORATED
STATEMENTS OF CONSOLIDATED CASH FLOWS (UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,356 $ 10,795
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 6,136 5,613
Non-cash compensation recognized under employee stock plans 1,164 1,958
Gains on sale of property, plant and equipment (3) (475)
Pension costs in excess of (less than) funding 782 (117)
Deferred income taxes 285 (813)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable (1,378) (2,015)
Inventories (207) (3,273)
Prepaid expenses and other current assets (942) (1,715)
Accounts payable and accrued expenses 837 (2,714)
Accrued income taxes 2,049 49
-------- --------
Net cash provided by operating activities 18,079 7,293
INVESTING ACTIVITIES
Proceeds from sales of property, plant and equipment 12 618
Acquisition of companies, net of cash acquired (1,000) (10,061)
Capital expenditures (8,756) (8,301)
-------- --------
Net cash used for investing activities (9,744) (17,744)
FINANCING ACTIVITIES
Proceeds from long-term debt 5,900 15,792
Principal payments on long-term debt (14,552) (4,694)
Net borrowings under short-term bank loans 423 953
Proceeds from stock options exercised 118 --
-------- --------
Net cash (used for) provided by financing activities (8,111) 12,051
Effect of exchange rate changes on cash and cash equivalents 26 (282)
-------- --------
Net change in cash and cash equivalents 250 1,318
Cash and cash equivalents -- beginning of period 4,433 3,416
-------- --------
Cash and cash equivalents -- end of period $ 4,683 $ 4,734
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
-4-
<PAGE> 7
CUNO INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 1999
NOTE 1 - BUSINESS AND BASIS OF PRESENTATION
CUNO Incorporated (the "Company" or "CUNO") designs, manufactures and
markets a comprehensive line of filtration products for the separation,
clarification and purification of liquids and gases. The Company's products,
which include proprietary depth filters and semi-permeable membrane filters, are
sold in the healthcare, fluid processing and potable water markets throughout
the world.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine-month period
ended July 31, 1999 are not necessarily indicative of the results that may be
expected for the year ending October 31, 1999. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Form 10-K for the year ended October 31, 1998.
In connection with the adoption of Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income", certain reclassifications
have been made to the prior year amounts to conform with the current
presentation.
NOTE 2 - EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the three months ended:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1999 1998
---- ----
<S> <C> <C>
NUMERATOR:
Net income $ 4,453,000 $ 4,233,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,258,057 16,159,553
Issued but unearned performance shares (110,228) (161,782)
Issued but unearned restricted shares (57,371) (49,880)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,090,458 15,947,891
============ ============
Weighted average shares outstanding 16,258,057 16,159,553
Effect of dilutive employee stock options 138,197 139,267
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,396,254 16,298,820
============ ============
Basic earnings per share $ 0.28 $ 0.27
Diluted earnings per share $ 0.27 $ 0.26
</TABLE>
5
<PAGE> 8
The following table sets forth the computation of basic and diluted
earnings per share for the nine months ended:
<TABLE>
<CAPTION>
JULY 31, JULY 31,
1999 1998
---- ----
<S> <C> <C>
NUMERATOR:
Net income $ 9,356,000 $ 10,795,000
============ ============
DENOMINATORS:
Weighted average shares outstanding 16,213,497 16,122,625
Issued but unearned performance shares (108,524) (176,709)
Issued but unearned restricted shares (42,178) (42,861)
------------ ------------
DENOMINATOR FOR BASIC EARNINGS PER SHARE 16,062,795 15,903,055
============ ============
Weighted average shares outstanding 16,213,497 16,122,625
Effect of dilutive employee stock options 74,934 106,808
------------ ------------
DENOMINATOR FOR DILUTED EARNINGS PER SHARE 16,288,431 16,229,433
============ ============
Basic earnings per share $ 0.58 $ 0.68
Diluted earnings per share $ 0.57 $ 0.67
</TABLE>
NOTE 3 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
1999 1998
---- ----
<S> <C> <C>
Raw materials $10,663 11,139
Work-in-process 2,966 3,703
Finished goods 13,380 12,804
------- -------
$27,009 $27,646
======= =======
</TABLE>
Inventories are stated at the lower of cost or market. Inventories in
the United States are primarily valued by the last-in, first-out (LIFO) cost
method. The primary method used for all other inventories is first-in, first-out
(FIFO). An actual valuation of inventory under the LIFO method can be made only
at the end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on management's
estimates of expected year-end inventory levels and costs. Because these are
subject to many factors beyond management's control, interim results are subject
to the final year-end LIFO inventory valuation.
NOTE 4 - NEW ACCOUNTING STANDARD
The Company has adopted Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" effective November 1, 1998. This Statement
requires that all components of comprehensive income and total comprehensive
income be reported and that changes be shown in a
6
<PAGE> 9
financial statement displayed with the same prominence as other financial
statements. The Company has elected to disclose this information in its
Statement of Stockholders' Equity. Total comprehensive income was comprised of
the following (amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31, JULY 31,
1999 1998
-------- --------
<S> <C> <C>
Net income $ 4,453 $ 4,233
Other comprehensive loss - foreign currency
translation adjustments (170) (567)
------- -------
Total comprehensive income $ 4,283 $ 3,666
======= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31, JULY 31,
1999 1998
---- ----
<S> <C> <C>
Net income $ 9,356 $ 10,795
Other comprehensive loss - foreign currency
translation adjustments (2,651) (1,927)
-------- --------
Total comprehensive income $ 6,705 $ 8,868
======== ========
</TABLE>
NOTE 5 - OTHER INCOME, NET
Other income, net as reported in the accompanying Consolidated
Statements of Income consisted of the following (amounts in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31, JULY 31,
1999 1998
---- ----
<S> <C> <C>
Interest income $ 46 $ 17
Exchange (losses) gains (138) 75
Gains on sale of property, plant and equipment 2 145
Other expenses (1) (133)
----- -----
($ 91) $ 104
===== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31, JULY 31,
1999 1998
---- ----
<S> <C> <C>
Interest income $ 129 $ 90
Exchange gains 93 155
Gains on sale of property, plant and equipment 3 475
Other expenses (83) (126)
----- -----
$ 142 $ 594
===== =====
</TABLE>
7
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTH PERIOD ENDED JULY 31, 1999 VS. THREE MONTH PERIOD ENDED JULY 31,
1998
NET SALES
The Company had record net sales of $56.3 million in the third quarter
of fiscal 1999 representing a 5.8 percent increase over 1998's third quarter
sales of $53.3 million. Had currency values been unchanged from the third
quarter of fiscal 1998, net sales for the third quarter of 1999 would have been
$0.7 million higher, or 7.2 percent greater overall than the comparable period
in fiscal 1998.
North American sales increased 3.2 percent in the third quarter as
compared to the same quarter in 1998. North American Water Group sales were
responsible for virtually all the growth. The Water Group (within the potable
water market) continued to record strong sales with its series of new filters
designed for the home appliance market. Sales in the North American Healthcare
business were relatively flat, reflecting diminished sales to one diagnostic
customer. Third quarter Latin American sales declined 27.6 percent from the same
quarter last year, but increased 9.4 percent when expressed in local currency.
See "Brazilian Real Devaluation" below for further details. Sales in Europe were
up 6.0 percent as compared to the same period in 1998, and up 11.0 percent when
expressed in local currency. Asia/Pacific sales increased by 25.9 percent as
compared to the same quarter last year and, excluding changes in currency values
over the period, increased 14.9 percent. The majority of the increase in
Asia/Pacific is due to the economic recovery in Southeast Asia after nearly two
years of recession. Also contributing to this increase were sales in Japan which
were 28.0 percent higher as compared to the same quarter last year, but only
11.0 percent higher when expressed in local currency. Much of the improvement in
Japan during the period is related to successful programs in the Healthcare
market.
The following table displays the Company's sales by market (amounts in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED CURRENCY
JULY 31, JULY 31, PERCENT ADJUSTED
1999 1998 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Potable Water $21,853 $17,952 21.7% 23.8%
Fluid Processing 18,591 19,418 (4.3%) (4.9%)
Healthcare 15,904 15,884 0.1% 3.0%
------- ------- -------- ------
Total sales $56,348 $53,254 5.8% 7.2%
======= ======= ======== ======
</TABLE>
The increase in Potable Water sales was primarily driven by continued
strong sales in North America associated with the aforementioned appliance
filters. The decrease in Fluid Processing sales primarily reflects the continued
worldwide slowdown in petroleum exploration and production caused by recently
depressed oil prices. A decline in sales of the Company's diagnostic membrane
products was the primary reason for the flat Healthcare sales in the third
quarter as compared to the same period last year. However, business conditions
in this market remain sound and improvement is expected in the next fiscal year.
8
<PAGE> 11
GROSS PROFIT
The Company's gross profit increased $0.3 million to $25.2 million in
the third quarter of 1999 from $24.9 million in the third quarter of 1998. Gross
profit as a percentage of net sales (gross margin) declined during that same
period from 46.8 percent in 1998 to 44.7 percent in 1999. The gross margin in
1998 benefited from an unusually favorable mix of sales. In the third quarter of
1999 the mix of sales was normally balanced and the gross margin more in line
with recent trends.
OPERATING EXPENSES
Selling, general and administrative expenses decreased by $0.1 million
in the third quarter of 1999 as compared to the third quarter of 1998.
Administrative and selling expenses decreased $0.1 million during the period due
principally to management's cost containment programs and the timing of certain
promotional expenses incurred during the third quarter last year but incurred
earlier in the current fiscal year. Research, development and engineering
expenses decreased $0.2 million in the third quarter as compared to the prior
year. All of the decrease was associated with the completion of certain key
projects and consulting agreements in place during the prior year.
OPERATING INCOME
As a result of the above, operating income increased $0.5 million, or
7.3 percent, to $7.3 million or 13.0 percent of sales in the third quarter of
1999 as compared to $6.8 million or 12.8 percent of sales in the third quarter
of 1998.
NONOPERATING ACTIVITY
Interest expense was down slightly ($0.1 million) quarter over quarter
as the level of debt outstanding decreased. See "Financial Position and
Liquidity" below. As detailed in Note 5 to the condensed consolidated financial
statements, other income, net was relatively flat quarter over quarter as no
material activity occurred in either of the two quarters.
INCOME TAXES
The Company's effective income tax rate for the third quarter of 1999
was 35.7% compared to 35.5% in the third quarter of 1998. The slight increase
reflects a change in the mix of income attributed to the various countries in
which the Company does business and their associated tax rates.
NINE MONTH PERIOD ENDED JULY 31, 1999 VS. NINE MONTH PERIOD ENDED JULY 31, 1998
NET SALES
The Company had net sales of $161.0 million in the first nine months of
fiscal 1999 representing an 8.4 percent increase over 1998's comparable sales of
$148.6 million. Had currency values been unchanged from the first nine months of
fiscal 1998, net sales for the fiscal 1999 would have been $1.5 million higher,
or 9.4 percent greater overall than the comparable period in fiscal 1998.
Strong performance in the Water Group continued to drive the North
American sales increase of 12.5 percent in the first nine months of 1999 as
compared to 1998. Additionally, Chemical Engineering Corporation, a manufacturer
of water treatment equipment purchased in March of last year, was only included
in the 1998 results for five months. Latin American sales declined 19.6 percent
during the first
9
<PAGE> 12
nine months of 1999 as compared to the same period last year; however, when
stated in local currency, sales increased 14.4%. For a discussion of the
currency impact in that region, see "Brazilian Real Devaluation" below. Sales in
Asia/Pacific increased 9.0 percent during the first nine months of 1999
reflecting the recent recovery underway in Southeast Asia. Sales in Europe were
relatively unchanged during the first nine months of the year when compared to
the first nine months of last year.
The following table displays the Company's sales by market (amounts in
thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED CURRENCY
JULY 31, JULY 31, PERCENT ADJUSTED
1999 1998 CHANGE CHANGE
---- ---- ------ ------
<S> <C> <C> <C> <C>
Potable Water $ 63,494 $ 45,849 38.5% 41.1%
Fluid Processing 53,658 56,183 (4.5%) (5.2%)
Healthcare 43,849 46,553 (5.8%) (4.3%)
-------- -------- ------ ------
Total sales $161,001 $148,585 8.4% 9.4%
======== ======== ====== ======
</TABLE>
The significant increase in Potable Water sales was due primarily to
improved sales in North America, however every geographic region other than
Latin America increased Potable Water sales during the period. Much of the
increase in North America was related to a new line of appliance filters
launched during the latter half of 1998. Additionally, the purchase of Chemical
Engineering Corporation was completed in March 1998, and therefore was included
in the Company's consolidated results for only five of the first nine months in
that year. Both Fluid Processing and Healthcare sales declined during the first
nine months of 1999 as compared to the same period in 1998. Fluid processing
sales have been adversely affected by a slowdown in the oil & gas industry, and
Healthcare sales have been adversely affected by lower sales to a diagnostic
membrane customer.
GROSS PROFIT
The Company's gross profit increased $2.1 million to $68.9 million in
the first nine months of 1999 from $66.8 million in the first nine months of
1998. Gross profit as a percentage of net sales (gross margin) decreased to 42.8
percent from 44.9 percent. The decrease in gross margin is attributable to:
start-up costs incurred during the first quarter of 1999 associated with a new
product in the Water Group; higher manufacturing costs in the U.S. membrane
operation associated with the introduction of new manufacturing processes; and,
an unusually favorable mix of sales in the third quarter of 1998 which did not
repeat in subsequent periods.
OPERATING EXPENSES
Selling, general, and administrative expenses increased by $3.5 million
in the nine months of 1999 over the comparable period in 1998, representing an
8.4 percent increase. Selling expenses increased $3.0 million reflecting the
Company's continued expansion of its marketing efforts and the addition of
selling expenses associated with businesses acquired over the past 18 months.
Research, development and engineering expenses increased $0.1 million over the
prior period.
10
<PAGE> 13
OPERATING INCOME
As a result of the above, operating income decreased $1.4 million, or
8.5 percent, to $15.5 million or 9.6 percent of sales in the first nine months
of 1999 as compared to $16.9 million or 11.4 percent of sales in the first nine
months of 1998.
NONOPERATING ACTIVITY
Interest expense was flat at $0.9 million for both the first nine
months of 1999 and 1998. As detailed in Note 5 to the condensed consolidated
financial statements, other income benefited from a gain on the sale of
property, plant and equipment of $0.5 million in the first nine months of 1998.
The majority of the gain occurred in the first quarter of 1998 from the sale of
a tract of land in Australia, which was unrelated to the business, resulting in
a pre-tax gain of $0.3 million.
INCOME TAXES
The Company's effective income tax rate for the first nine months of
1999 was 36.3% compared to 35.2% in the first nine months 1998. The increase
reflects a change in the mix of income attributed to the various countries in
which the Company does business and their associated tax rates.
FINANCIAL POSITION AND LIQUIDITY
The Company assesses its liquidity in terms of its ability to generate
cash to fund operating and investing activities. Of particular importance to the
management of liquidity are cash flows generated by operating activities,
capital expenditure levels, and adequate bank financing alternatives.
The Company manages its worldwide cash requirements considering the
cost effectiveness of the funds available from the many subsidiaries through
which it conducts its business. Management believes that its existing cash
position and available sources of liquidity are sufficient to meet current and
anticipated requirements for the foreseeable future.
Set forth below is selected key cash flow data (in thousands of
dollars):
<TABLE>
<CAPTION>
Source/(Use) of Cash NINE MONTHS ENDED
JULY 31,
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES:
Net cash provided by net income plus depreciation,
amortization and non-cash compensation $ 16,656 $ 18,366
Accounts receivable (1,378) (2,015)
Inventory (207) (3,273)
Accounts payable and accrued expenses 837 (2,714)
Accrued income taxes 2,049 49
Net cash provided by operating activities 18,079 7,293
INVESTING ACTIVITIES:
Capital expenditures (8,756) (8,301)
Acquisition of companies, net of cash acquired (1,000) (10,061)
FINANCING ACTIVITIES:
Net change in total debt (8,229) 12,051
</TABLE>
11
<PAGE> 14
The net cash provided by net income plus depreciation, amortization and
non-cash compensation is an important measurement of cash generated from the
earnings process before significant non-cash charges. The decrease in net income
plus depreciation, amortization and non-cash compensation of $1.7 million
reflects the Company's reduced gross profit margin and increased selling,
general and administrative expenses as discussed previously above. Overall,
improved management of accounts receivable, inventory, accounts payable and
taxes payable contributed to the $10.8 million increase in cash flow provided by
operating activities during the Company's first nine months of 1999 compared to
the prior year.
Capital expenditures amounted to $8.8 million in the first nine months
of 1999 and were primarily comprised of purchases of machinery and equipment. In
the second quarter of fiscal 1999, the Company made a planned $1.0 million
contingent consideration payment related to the acquisition of Chemical
Engineering Corporation. This payment was recorded as additional goodwill.
During the first nine months of fiscal 1998, the Company utilized $10.1 million
of cash to complete the acquisition of Chemical Engineering Corporation and
certain other distribution operations. All of the Company's acquisitions have
been accounted for as purchases and, accordingly, the results of their
operations are included in the Company's consolidated statements of operations
from the date of acquisition.
Due largely to the Company's strong cash flows from operating
activities ($18.1 million) in the first nine months of 1999, the Company was
able to reduce its long-term debt, on a net basis, by $8.2 million.
OTHER MATTERS
BRAZILIAN REAL DEVALUATION
CUNO has a subsidiary located in Brazil. A significant devaluation in
the Brazilian Real took place late in the Company's first quarter. Throughout
much of the Company's second and third quarters, the Real was relatively stable,
albeit substantially weaker relative to the US Dollar as compared to the
beginning of the Company's fiscal year. The Brazilian subsidiary accounted for
approximately seven percent of consolidated net sales in 1998. Although the
Brazilian subsidiary remained profitable during fiscal 1999 and the devaluation
had only a minimal impact on the Company's consolidated results of operations,
any future effects on the business climate in this region are yet to be
determined. A significant portion of the products sold by the subsidiary in
Brazil are manufactured locally - this should continue to help minimize the
impact of the devaluation on future earnings. See "Market Risk Disclosures"
below.
COMPLIANCE WITH YEAR 2000
The Company has substantially completed its internal program to
remediate its Year 2000 requirements. It has completed the remediation of both
its information and non-information technology systems. The Company continues to
communicate with its suppliers, customers and other service providers to
determine the extent of the Company's exposure to the failure of third parties
to remediate their own Year 2000 needs.
The most likely worst case scenario would be that a failure by the
Company or one or more of its vendors or suppliers to adequately and timely
address the Year 2000 issue could interrupt manufacturing of the Company's
products for an indeterminable period of time. The Company is identifying
alternative vendors should a vendor's ability to meet the Company's raw material
and supply requirements be impacted by the Year 2000 issue. In conjunction with
this effort, the Company continuously monitors its
12
<PAGE> 15
action plans to address its Year 2000 requirements, including contingencies to
address unforeseen problems. This is potentially a significant issue for most,
if not all, companies, with implications which can not be anticipated or
predicted with any degree of certainty.
The risk to CUNO resulting from the failure of the Company's own
information systems or third parties to attain Year 2000 readiness is similar to
other manufacturing firms and business enterprises. These risks include (1)
disruptions in information systems used for transaction processing, (2)
disruptions in factories and facilities used in the manufacturing process, (3)
disruptions in the supply of raw materials and other components from major
vendors, and (4) disruptions in the shipment of manufactured goods to major
customers due to their Year 2000 noncompliance.
The Company is expensing software maintenance or modification costs as
incurred. The costs of new leased software is being expensed over the term of
the lease while items of a capital nature are being depreciated over their
estimated useful lives. To date, the Company has expensed approximately $50,000
in maintenance or modification costs (excluding operating lease payments for new
systems implemented as part of the Company's 1996 spin-off from its former
parent) and capitalized approximately $175,000 of expenditures related to year
2000. Based on information currently available, the total remaining capital
maintenance or modification costs are not expected to be material.
EUROPEAN ECONOMIC AND MONETARY UNION
On January 1, 1999, the Euro became the official currency of the
European Economic and Monetary Union (the "Union"). Companies in the Union may
begin conducting their business operations in the new currency, however, the
previous local currencies in those countries may also continue to be used as
legal tender through January 1, 2002.
The Company has implemented its program to accommodate the new
currency. Software used by the Company at its European facilities is capable of
handling multi-currencies, including the Euro. As such, the Company is able to
accept customer or supplier orders in either the new Euro or the previous local
currency. The Company continues to address the Euro's impact on its operations
(e.g. banking, payroll processing, pricing, currency hedging requirements, etc.)
The estimated costs of any remaining required system modifications and other
operational changes are not expected to be material to the Company.
MARKET RISK DISCLOSURES
Other than the "Brazilian Real Devaluation" discussed previously above,
there have been no material changes in the information reported in the Company's
Form 10-K for the year ended October 31, 1998 under the "Market Risk
Disclosures" section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
FORWARD LOOKING INFORMATION
The Company wants to provide stockholders and investors with more
meaningful and useful information and therefore, this quarterly report describes
the Company's belief regarding business conditions and the outlook for the
Company, which reflects currently available information. These forward looking
statements are subject to risks and uncertainties which, as described in
Management's Discussion and Analysis in the Company's Annual Report on Form 10-K
for the year ended October 31, 1998, could cause the Company's actual results or
performance to differ materially from those expressed herein. The Company
assumes no obligation to update the information contained in this quarterly
report.
13
<PAGE> 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Documents filed as part of this report.
Exhibit 27. Financial Data Schedule (submitted electronically herewith)
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter for which this 10-Q is
filed.
14
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CUNO INCORPORATED
Date August 31, 1999
-----------------------------
By /s/ Frederick C. Flynn, Jr.
--------------------------------
Frederick C. Flynn, Jr.
Senior Vice President -
Finance and Administration,
Chief Financial Officer,
Treasurer and Assistant Secretary
By /s/ Timothy B. Carney
--------------------------------
Timothy B. Carney
Vice President, Controller,
and Assistant Secretary
15
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